On the 1st April 2023, Inland Revenue released Determination EE004 regarding home costs.
Determination EE004, determines that if you reimburse an employee who is working from home you may pay them only their extra costs.
This would include, for example, reimbursement for the extra power they use.
Oddly, you can’t pay for a share of the rent, rates or insurance, which allow your staff member to work from home for your benefit. The department argues the employee is going to incur the cost anyway, so it’s a private cost.
For the self-employed, partner in a partnership or shareholders in a look-through company there is no problem because they can apportion all costs on an area basis. A look-through company is not a company from the Inland Revenue perspective. It is a partnership
Shareholder Employees
For shareholder employees, there is a problem because they are employees and need to be treated as such from a tax perspective.
There is a perfectly reasonable way around this. The shareholder employee should charge the company a market rental for the space used. This would become tax-deductible for the company and taxable income for the shareholder employee. The individual could then deduct a fair share of the costs of the house against the rental income and show a small profit in their tax return.
Contributing to the fixed costs for employees
If you are feeling generous towards your employee working from home, you could use exactly the same principle as in the paragraph above.
Your business can pay rent to an employee for the use of their home.
The employee could charge your business a fair market rent and claim a fair share of costs against this, returning any surplus as taxable income.
This ought to be at market rate, which is not always easy to work out.
The internet might find you the average profit made on domestic rentals, which is probably as good a guide as you can get.
You will need to remind employees that your payments are no longer a reimbursement, but rent for part of their house. They are making a profit and so would need to show this in their personal tax returns.
